Dan Grgurich – Director, Investor Relations and Corporate Communications Stephen Macadam – President and Chief Executive Officer Alexander Pease – Senior Vice President and Chief Financial Officer.

Jeffrey Hammond – KeyBanc Capital Markets, Inc. Joe Mondillo – Sidoti & Co. LLC Todd Vencil – Sterne, Agee & Leach, Inc..

Good morning. My name is Leanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro Industries Second Quarter 2014 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session.

(Operator Instructions) Dan Grgurich, Director, Investor Relations and Corporate Communications, you may begin your conference..

Thank you, Leanne. Good morning and welcome to EnPro Industries quarterly earnings conference call. I'll remind you that our call is being webcast at enproindustries.com, where you can find the slides accompanying the call.

Steve Macadam, our President and CEO and Alex Pease, Senior Vice President and CFO will begin their review of our second quarter performance and our outlook in a moment.

But before we begin, I will point out that you may hear statements during the course of this call that expresses belief, expectation or intention as well as those that are not historical fact.

These statements are forward-looking and involve a number of risks and uncertainties that may cause actual events and results to differ materially from forward-looking statements.

These risks and uncertainties are referenced in the Safe Harbor statement included in our press release and are described in more detail along with other risks and uncertainties in our filings with the SEC, including the Form 10-K for the year ended December 31, 2013.

We do not undertake to update any forward-looking statements on this conference call to reflect any change in management’s expectations or any change in assumptions or circumstances on which statements are based. You should also note that EnPro owns a number of direct and indirect subsidiaries.

From time-to-time, we may refer collectively to EnPro and one or more of its subsidiaries as we, or to the businesses, assets, debts or affairs of EnPro or a subsidiary as ours.

These and similar references are for convenience only and should not be construed to change the fact that EnPro and each subsidiary is an independent entity, with separate management, operations, obligations and affairs.

I want to remind you that our financial results reflect the deconsolidation beginning on June 5, 2010 of Garlock Sealing Technologies LLC, Garrison Litigation Management and their subsidiaries, which we refer to as GST.

The results of these entities will remain deconsolidated during the pendency of the Chapter 11 legal proceedings to resolve asbestos claims against GST. We refer to this as the Asbestos Claims Resolution Process or ACRP and you will hear us use that acronym during the call today. GST’s summary results are presented separately in our earnings release.

In addition to our usual discussion of EnPro's financial results for the quarter and six months ending June 30, 2014 and 2013 we will be discussing pro-forma unaudited consolidated financial information.

On May 29, 2014, GST filed its amended proposed plan of reorganization which is briefly described in our earnings release and is available on our website. Under this plan of reorganization we would retain 100% of the equity interests of GST.

Under accounting rules GST's financial results cannot be reconsolidated with our results until GST exits the Chapter 11 process upon the confirmation and completion of a plan of reorganization.

In our earnings release however, we included pro-forma financial information that illustrates the effect of reconsolidation of GST based on the terms specified in GSTs amended plan of reorganization.

You should refer to our earnings release for important information regarding how this pro-forma financial information is derived as well as the risks and uncertainties related to confirmation and completion of the amended plan of reorganization.

Any pro-forma financial information discussed on the call today is derived from the condensed pro-forma financial statements included in the earnings release. These consolidated pro-forma financial statements are based on estimates and assumptions which has been made solely for the purposes of developing such pro-forma information.

They also include certain adjustments such as increased depreciation and amortization expense on tangible and intangible asset, increased interest expense on the debt incurred to complete the reconsolidation, as well as the tax impacts related to these adjustments.

The pro-forma adjustments are based upon available information and certain assumptions that EnPro believes are reasonable.

The unaudited pro-forma financial information is presented for information purposes only and is not necessarily indicative of what the consolidated company’s financial position or results of operations actually would have been had the reconsolidation been completed as of the dates indicated, nor is it necessarily indicative of the future operating results or financial position of the consolidated company.

Therefore, the actual amounts recorded at the date the reconsolidation occurs may differ from the information presented in the earnings release or discussed on this call. And now, I'll turn the call over to Steve..

Thank you, Dan, and good morning, everyone. As you can see in our earnings release we reported a slight increase in consolidated sales compared to the second quarter of 2013. Sales grew from the benefit of foreign exchange and the impact of two small acquisitions completed in March of this year.

Excluding those items organic sales were about flat with the second quarter of 2013. As Alex will discuss in more detail, the Sealing Products segment's sales were well above the second quarter of 2013 by about $9.5 million or 6%, including the impact of acquisitions and foreign exchange.

Sales in the Engineered Products segment were about the same as prior year. And sales in the Power Systems segment were down about $2 million or 4%. Sales at GST, our deconsolidated entity were 3% lower than the second quarter of last year. As noted in the first quarter demand remained mixed.

We experienced increases in our semiconductor, aerospace, nuclear and heavy-duty truck markets as well as in our European industrial and automotive markets. However, activity was slower than last year in the oil and gas pipeline market and we had lower engine and related service revenues.

The quarter ended however with stronger quoting and bookings activity particularly for engine parts at Fairbanks Morse and compressor components at CPI's North American businesses.

Looking at profitability for the quarter, our overall gross margins declined 1.2 points from the second quarter of 2013, largely due to increased semiconductor and OEM sales which carry lower margins and a lower margin mix also in the power systems segment.

SG&A costs were also higher as we invested in R&D, ERP upgrades, the Stemco distribution center implementation, and selling and support resources. In addition, several of the business had expenses related to severance and changes to doubtful accounts and inventory reserves.

As a result the segment profits of $35.1 million were 11.2% of sales compared to segment margins of 14% in the second quarter of last year. The deconsolidated results of GST included $63 million in net sales, down about 3% from the second quarter of last year.

GST's operating profit margins before asbestos related expenses were 22% of sales, down from an unusually high 25.6% in the second quarter of 2013, reflecting both higher SG&A expenses this year and the lack of the one-time increase demand from high margin products we had a year-ago when a GST competitor was temporarily dislocated from the marketplace.

EnPro reported consolidated net income in the second quarter of $8.3 million or $0.32 a share and adjusted net income of $15 million or – sorry, $0.57 a share. The deconsolidated operations of GST, which did not report income on a per share basis reported adjusted net income of $9.3 million, compared to $11.3 million for the second quarter of 2013.

In late June, we completed an additional exchange of our common stock for a total of about $42 million of our convertible debentures, further reducing the principal amount of those debentures from $116.4 million to $74.8 million. Alex will discuss the exchange in more detail.

Also in the quarter we made two very positive announcements affecting our Power Systems segment.

First, as we alluded to in last quarter's call, Fairbanks Morse won a significant multi-year contract along with its consortium partner Westinghouse France to supply 23 3.5 megawatt opposed-piston, diesel engine-generator sets to Electricite de France or EDF for emergency back-up power at 20 nuclear plants in France.

The contract worth over $120 million to Fairbanks Morse at current exchange rate is a major win and gives us confidence in the viability of Fairbanks Morse's strategy to serve commercial markets. A small amount of revenue will be recognized in 2015 but the majority will be in 2016 and 2017.

Second, Fairbanks Morse and MAN Diesel & Turbo finalized a new strategic agreement to cooperate in the U.S. power generation market for gas and dual-fuel engines. Companies agreed on an exclusive multi-year arrangement that gives us access to MAN gas and dual-fuel engines for the U.S. power sector.

We can now offer units up to nearly 20 megawatts and expand our range of high quality and flexible power generation solutions. This agreement which is separate and apart from the MAN license agreements for mid-speed diesel engines for the U.S.

government marine applications opens up substantial new segments in the power generation market for us at a time when distributed energy is clearly on the rise in the United States.

Finally, with the filing of GST's amended plan of reorganization in May were providing pro forma financial statements that illustrate, however, results might look where GST reconsolidated with EnPro. Alex will provide more specifics, but our intention is to help provide greater clarity to our investors of EnPro's underlying value.

To update you on the ACRP, in May, GST submitted an amended plan of reorganization that reflects the Court $125 million estimate for this mesothelioma liability. And they both GST and we believe is best suited to win confirmation with or without asbestos claimant support.

In addition to amounts believed more than sufficient to resolve the mesothelioma claims under the plan. The plan also includes amounts for settlement for non-mesothelioma claims, a litigation option in Federal Court for all claimants and funds to cover administrative and litigation costs.

In all it provides for funding of $275 million for the settlement of present and future asbestos claims that had not been resolved by settlement or verdict prior to the ACRP.

An additional amount will be required for asbestos claims that were previously resolved by settlement or verdict, but had not been paid prior to the commencement of the ACRP, a bar date of September 30 has been set to submit these previously resolved and unpaid claims.

As we've stated before, we believe the settlement with the claimant representatives would be the most expedient path to a resolution for all parties, as it would enable GST to achieve a more timely and efficient resolution to the case.

However, thus far claimants' representatives have not responded reasonably to the Court's estimation decision, and in fact have filed the motion to reopen the estimation trial due to allegations that GST committed fraud in the discovery process and in trial..

The next step towards resolution is that, the Court approved the GST planned [ph] disclosure statement, which is the document that GST will ultimately send to creditors to solicit their support.

The hearing on the disclosure statement was previously scheduled for August, but has been continued until October 7, at the request of the committee representing current asbestos claimants. Now, I'll turn the call over to Alex to review our results in the second quarter.

Alex?.

Thanks, Steve. As Steve mentioned, second quarter sales of $313.1 million were up slightly from the same period of 2013. Foreign exchange and two acquisitions completed in the first quarter of this year, each contributed 1% of growth.

Organic sales were essentially flat compared to the second quarter of 2013, as increases in the Sealing Products segment were largely offset by lower Power Systems segment revenues.

By geography, after adjusting for foreign exchange and acquisition, sales in Europe were up 3% overall from the second quarter of last year with improvements in CPI and Technetics. However, the consolidated Garlock companies European sales were lower primarily due to reduced oil and gas project activity.

In North America, Technetics sales were up significantly and sales of Stemco were moderately higher. The Garlock companies CPI and SME all reported North American sales below the second quarter of 2013. I'll discuss the performance of our individual businesses in more detail when I cover our segment results.

For the quarter, gross profits were $1.1 million lower than in the second quarter of 2013 and gross profit margins decreased to 34.5% from 35.7% in the second quarter of last year.

Favorable volume at Technetics and Stemco along with favorable pricing actions and lower raw material costs at almost all of our businesses were more than offset by unfavorable volume and mix at the consolidated Garlock operations, CPI and Fairbanks Morse and by higher costs at all divisions except for CPI and GGB.

As Steve mentioned earlier, many of these costs do not reflect structural changes in our cost structure, but rather investments in period adjustments. SG&A expense of $83.5 million in the second quarter was higher compared to the second quarter of last year by about $7.9 million.

Higher corporate costs accounted for $2.2 million of the increase with the remainder spread across our operation. The corporate increase was primarily driven by increases in employee medical costs, purchased services, and employee compensation and benefits.

The increase in SG&A at the operations largely reflect expenses related to project related investments in new ERP systems, R&D, manpower related increases, and other adjustments in the second quarter of 2014. In addition, the second quarter of 2013 reflected a favorable $900,000 research tax credit.

Looking at our segments operating performances, sales in the Sealing Products segment were $175.4 million in the second quarter, which represents the 6% increase over the second quarter of 2013.

Higher activity in Technetics markets especially semiconductor, aerospace, and nuclear power, and higher heavy-duty truck parts at Stemco contributed to the increase, excluding foreign exchange and acquisitions, the segment sales improved by about 4%.

Sealing Products segment profits were down about – were down $4.9 million from a year ago to $22.8 million.

The largest drivers of the change in segment profits were lower volume at consolidated Garlock, a less profitable mix at Stemco, and higher operating and SG&A costs, which I'll talk about more that discuss the individual businesses within the segment.

In addition, a one-time cash credit benefited the second quarter of 2013, but was not repeated this year and severance costs were higher. Segment margins were 15% in the quarter compared to 16.7% in the second quarter of 2013. Looking at the businesses within the segment, the consolidated Garlock operations reported a decrease in organic sales.

Softness in oil and gas related markets and process manufacturing markets in Europe more than offset increases in Asia. Lower volume, new product development expenses, and higher selling and administrative expenses reduced margins.

Sales at Technetics were up strongly compared to the second quarter of 2013, as the business is benefited from higher demand from semiconductor, aerospace, and nuclear power markets. As volumes increased, gross profit and gross profit margins at Technetics improved over the second quarter of 2013.

However, segment margins declined as SG&A expenses increased compared to the second quarter of last year, again, reflecting the impact of factors I mentioned earlier.

Sales at Stemco also improved compared to the second quarter of 2013, and driven by OEM demand for its wheel end and brake products and to a lesser extent the acquisition of the remaining interest in the Crewson joint venture that produced this Stemco's brake adjusted products.

Costs were higher at Stemco, as work continued on completing the central distribution center consistent with our strategy to shift multiple products in the same load and improve the efficiency of Stemco's brake movement.

The vast majority of Stemco's customers are now being served by the distribution center, and we expect to see increasing benefits as we move into 2015 because of these and other related investments. SG&A costs including R&D investments were also higher at Stemco.

In the Engineered Products segment, second quarter sales were $95.5 million, roughly equal to last year's second quarter. The contribution from foreign exchange was about $2.1 million, or 2% of sales.

Profits and margins of $8.9 million were up in the segment as price improvements at both GGB and CPI more than offset the negative impact of lower volume primarily at CPI. Margins increased to 9.3% from 9.0%.

Sales at GGB improved by about 3%, almost all of which was the result of favorable foreign exchange, modest improvement in Europe and Asia sales were offset by softness in North America and Latin America. In North America, automotive demand was up, but other industrial markets were down compared to the second quarter of 2013.

GGB's profit margins improved especially in its European operations due to its lower scrap, lower material costs, and better labor efficiencies. Margins also benefited from lower costs in 2014, as we've realized the benefit of implementing new ERP systems in the segment over the last two years.

Sales were down at CPI because of lower volumes in North America yet European markets remained firm. Lower material costs and higher pricing more than offset the reduction in volume. The higher SG&A spending resulted in a slight decline in margins for the quarter.

We anticipate modest improvements in the North American market as demand and natural gas prices rise. In the Power Systems segment, sales were $43 million, 4% lower than in the second quarter of 2013.

New engine revenues and profitability decreased due to a timing delay in the shipment of the completed contract engine, and lower revenues from engine upgrades compared to the second quarter of last year. However, parts sales and parts order rates increased significantly.

Segment margins reflected a low margin on the engine sales, specifically on a commercial opposed-piston engine we sold to a South American oil and gas producer and due to the timing delay I mentioned earlier.

We expect margins to improve on future sales as we further develop our commercial engine strategy, including the recent development with EDF, which represents a significant strategic commercial success. The segments second quarter margins also reflect higher SG&A expenses primarily in strategic R&D.

These expenses are related to the development of the OP 2.0 engine that we have described earlier, which is progressing nicely. As Steve mentioned, we reported GAAP net income of $8.3 million, or $0.32 a share for the quarter. This compared to GAAP net income of $8.0 million, or $0.35 a share in the second quarter of last year.

Although net income increased, a higher share count reduced earnings per share. I will explain the reasons behind the increase in the share count shortly. Excluding interest to GST, a non-cash loss in the exchange of debt and other selected items, we are in $0.57 per share this year compared to $0.87 per share in the second quarter of 2013.

The adjustments that take our second quarter 2014 GAAP earnings from $0.32 per share to $0.57 per share are the following; a reduction of $0.05 per share in the exchange of debt, $0.19 of interest to GST, and $0.01 of restructuring costs in the Sealing Products segment.

The EPS comparison to the second quarter of 2013 reflects the 3.5 million increase in our diluted share count primarily related to our convertible debentures. As we explained last quarter, the number of diluted shares varies with the price of our stock and has grown as our share price increased.

We have hedge agreements in place that will reduce the dilution upon maturity of the debentures, but GAAP accounting does not allow us to record that benefit prior to their maturity.

The debentures mature in October of next year, had an assumed share price of $72, approximately 2.7 million shares would be returned to EnPro upon maturity of the hedge arrangement.

I will also point out that the benefit of this hedge is based on the original $172.5 million amount of the debentures and has not been affected by the recent exchanges of debentures for our common stock.

Steve mentioned that during the second quarter, we exchanged $41.6 million in aggregate principal amount of the debentures, the 1.3 million shares of our common stock, plus cash payments for the holders for accrued and unpaid interest in fractional shares.

This transaction reduced the aggregate principal amount of the convertible debentures outstanding to $74.8 million and reduced future cash interest payments associated with these debentures by $2.2 million. We've recognized non-cash pre-tax loss of $2.4 million on the exchange to debentures, which were trading at a substantial premium.

After-tax the loss was $1.5 million, or $0.05 a share. In addition, there was a $600,000 cash tax benefit reported directly to equity. Our consolidated free cash flow for the six months ended June 30, 2014, was a use of $30.1 million compared to a use of $2.3 million in 2013.

Free cash flow in the first six months reflect lower earnings, higher cash tax payments, higher working capital investments, and lower capital spending. The higher working capital is due largely to the timing of inventory at the Power Systems segment and safety stock investments at GGB and Stemco.

Capital spending was about $14 million year-to-date compared to $17 million in the comparable period last year when we purchased the European manufacturing facility for GGB. The non-operating source of cash represents borrowings against our revolver.

We ended the quarter with a cash balance of approximately $65 million, about the same as our balance at the end of 2013.

Taking a look at the deconsolidated results of GST for the second quarter, net sales were $63.0 million compared to $64.8 million in 2013, reflecting lower demand in North American petrochemical, refinery and metals processing market as well as lower intercompany shipments of the European affiliates.

GST's operating profit before asbestos related expenses was $13.9 million, or 22.1% of sales compared to $16.6 million, or 25.6% of sales in 2013. Margins were unusually high in 2013 as GST benefited from favorable competitive dynamics. In 2014, in addition to the impact of the lower volume, GST had higher manufacturing in SG&A expenses.

GST's adjusted net income was $9.3 million in 2014 compared to a $11.3 million in 2013.

GST reduced the asbestos claims liability accrual on its financial statements to approximately $280 million after considering the bankruptcies – the bankruptcy courts reasonable and reliable estimate of its liability for mesothelioma claims and its amended proposal, proposed plan of reorganization.

GST believes that $280 million is the low end of the range of possible resolution amounts and therefore, because they cannot take a point in the range that is any more likely, GST believes it to be the appropriate amount to accrue on its financial statements. The ultimate liability could differ.

This resulted in a large year-over-year benefit change in GST's asbestos related expense line on their statement of operation. In addition, litigation expenses were over $7 million lower compared to the second quarter of 2013, when preparations for the liability estimation trial were underway.

GST's cash and investment balance was $216.2 million at the end of the second quarter. Earlier Steven introduced the unaudited pro forma financials that illustrate what a reconsolidated GST into EnPro might look like? I encourage you to download them from our website and contact Dan, if you have questions.

I don’t want to take much more of the time in today's call to review them, but I do want to point out a few metrics calculated using the pro forma financials. Eliminating entries reflect about a $451 million pro forma one-time pre-tax gain upon reconsolidation, or $283 million after-tax.

Also for the quarter ending June 30, 2014, the following estimates are illustrated. Pro forma sales of $357.7 million, pro forma adjusted EBITDA of $54.6 million, pro forma EPS of $0.91 a share, and pro forma net debt of $118.6 million. Now, I'll turn the call back to Steve..

Thanks, Alex. Looking at the third quarter of the year, we are encouraged to see continued strength in demand in our heavy-duty truck, semiconductor, aerospace, and automotive markets, and signs of improvement in CPI's North American gas markets.

In addition, though Power Systems sales should be on par with their second quarter sales, the mix should be heavier and more profitable parts – be a more profitable parts content.

Our segment profits in the third quarter should benefit from improved – improving sales volume, other operational improvements we have made particularly in the Engineered Products segment, and the more profitable mix at Power Systems.

Overall, we anticipate improved returns compared to the second quarter of last year, the second quarter and to last year's third quarter results.

We also expect to benefit longer-term from a number of strategic growth initiatives underway, including our investments in this Stemco distribution center, the new opposed-piston engine in Power Systems, and focus business development efforts across the company. Now, we will open the line for your questions..

(Operator Instructions) And your first question comes from the line of Ian Zaffino from Oppenheimer. Your line is open. Ian Zaffino, your line is open..

Hello, Ian, we can't hear you..

Your next question comes from the line of Jeffrey Hammond from KeyBanc. Your line is open..

Operator, we can't hear Jeff either do we have a technical issue?.

One moment please. My apologies; just one moment, please. Your next question comes from the line of Jeffrey Hammond from KeyBanc. Your line is open..

Hey, can you hear me guys?.

Yes, we got you, Jeff. Sorry about that..

Okay. Okay. Yes, no worries. Okay. Just in sealing, I guess, I want to understand better the – your margins have been under a lot of pressure and I just want to understand what's kind of sustainably higher SG&A or higher R&D and what's – what's sustainable negative mix.

This business kind of used to be at 17%, 18% margin business and it just seems like that the margin trend has been generally unfavorable..

Yes, well, we had a – let me start, Jeff, this is Steve and then I'll let Alex add a little bit more color but in the quarter – I got both year-to-date numbers to help you and also second quarter numbers so let me walk through both of those.

And I'm going to talk about the whole company and then I'll try to differentiate what is sealing versus the other businesses but we've had a number of pretty expensive severances that happened in Europe in sealing products. We also had some AR and inventory one-time adjustments that were almost all in sealing products.

And then we had the Stemco distribution center implementation cost which is around higher than we expected, than that we wanted. But there's certainly period cost. Now those will continue to some extent through the balance of the year. Hopefully, we'll be trending down but certainly are not structurally higher cost.

So if you look at those four categories alone across the entire – and I'll get to R&D in a second so those four categories alone in Q2 that number is $5.6 million of cost and year-to-date that would be $8.3 million of cost total, so if you add all those categories together, so it's not insignificant, and again those are all what I would say some unusual but some I wouldn't call them unusual but they're certainly period specific and not structural.

On the R&D front we've been investing as you know quite a bit in this OP 2.0, in Power Systems as well as we haven't talked about a lot and we're still not prepared to talk about it, but we have a pretty aggressive R&D effort going on in Stemco.

We still consider it confidential because we don’t really want the marketplace to know what we're working on but we're investing fairly significantly in that, but we were last year as well. So, let me give you – and then across the whole company we're also distending a lot of it in sealing products in Garlock.

We're investing more money in R&D and we're trying to actually step up our innovation and product development across the whole company. So if you look at just across all of EnPro, last year June year-to-date we spent $6.3 million on R&D in total..

So those are discrete things. We feel actually quite good about all of the R&D investments. We still don't spend a lot of money in R&D and product development relative to kind of our peer group. We think that's actually an opportunity.

As you know we compete in lot of mature markets with mature products and we're actually pretty excited about the potential that we're seeing in all of our R&D work, in particular, the OP 2.0 for Fairbanks and the Stemco project.

So, anyway Alex, you want to add anything to that?.

It's the only thing I was going to say. While Steve was talking I was looking a little bit of the outlook for the year. And clearly we had a bit of compression this quarter as – from the reasons that Steve mentioned, if you think about the full-year outlook.

It's probably more along the lines of – well if you look at our year-to-date numbers you're probably looking at almost a point of improvement for the full year. So the back-half of the year should look fairly better as a lot of these more periodic expenses don’t reoccur..

Okay.

So just to be clear, that the $5.6 million is a total company number; these kinds of severances, AR, inventory, Stemco implementation or that's the sealing number?.

No, that's the whole company, $5.6 million, but I would say, that's [ph] – 80%-plus of that is sealing, Jeff..

Okay. In the….

Because the Stemco implementation obviously that's all in sealing, the severance, some of the high cost severance that we had, not all of it, the high cost of this was in primarily in Technetics. And then all of the AR and inventory – not all, but the vast majority of the AR and inventory was all in Garlock. So, yeah and then….

Okay. So the margins in – well, go ahead..

We also had margin, excluding the cost, Jeff. I mean we did have some margin pressure in the pipeline segment which we mentioned in the script.

The pipeline segment of Garlock, because – I don't want to lay it all on these cost things, because we have a very kind of profitable – very good margin product line that's in the oil and gas part of Garlock that demand was off considerably.

So we got hit by mix and that also – those margin under pressure because it's a competitive attack on a particular product line, So that's in there as well on the Sealing. We were just trying to explain these one-time cost issues..

Okay.

So if we look into the second-half, I mean, do the margins look closer to the 12% in the first-half or the 15.5% we did in the second-half last year?.

Really, I….

In the Sealing?.

In between that. Probably not all the way towards what we were – where we performed last year….

Because we still have mix issues and we still have….

Well, you're going to continue to see, yeah, you'll continue to see the pressure within the pipeline business that Steve just mentioned and you're going to continue to see the implementation costs related to the distribution center and you're likely to continue to see a higher R&D expense kind of continue as we make some of these investments.

What you won't see are the high severance expenses, you also won't see the bad debt and the inventory, about reserve adjustments..

Okay. I'll get back in queue. Thanks guys..

Okay. Jeff..

Your next question comes from the line of Joe Mondillo from Sidoti. Your line is open..

Hi, guys.

How are you doing?.

Good, Joe..

I just wanted to clarify one thing with that last topic that you were discussing. On the $5.6 million number, does that include R&D and Stemco's distribution or is that just sort of severances, AR inventory sort of one-time type that we won't see….

Yes, let me repeat it. So it's $5.6 million for the quarter only. And it does include – it does not include R&D but it does include the Stemco distribution implementation cost, the Stemco SDC. So….

Okay.

Some of that $5.6 million we will see related to Stemco in the back-half?.

Correct, correct. That's a little over $1 million a quarter but as Alex mentioned in the script we certainly expect that to be declining through the back-half of the year.

We've got into the point, where now – where the team as of today, if you will, we're shipping over 90% of the customers from the SDC and the nature of the implementation costs were as we transitioned customers to the SDC we did it in chunks.

And so we were shipping to customers out of both the manufacturing facilities and the distribution center as we were moving chunks over. So we were carrying essentially redundant labor in both the manufacturing locations and the distribution center.

So we have really broken the back of that implementation and so from this point on and we believe that all the customers will be fully transitioned literally within the next couple of weeks and so hopefully the team will be able to continue to get the benefits frankly that we hoped to get from that.

The reason we did it is to ship our customers one load instead of multiple loads out of multiple facilities, send one invoice, send it out to the (inaudible) to the small parcel shipment et cetera. So the economics we believe are solid.

So it's just really a question of how quickly we're going to be able to get to the benefit level of that project versus cost of implementation. But – so the cost will trend down through the back-half of the year and we're – we would want to just manage everyone's expectations.

We certainly hope that it will be swing to the positive side by – as we enter 2015.

Okay?.

Okay. Yes, it's perfect. That's for that clarification..

Yes..

My next question, I wanted to ask about the Power Systems business.

And a couple of things, so first off, you mentioned that the working capital is up due to inventory build, but you also mentioned that the revenue in the back-half of the year should be similar to the first-half, so I'm just wondering is that inventory build more so for first-half of 2015 or why is the revenue not sort of – if you're building inventory why are you not seeing…?.

Yes, so a couple of reasons, so first of all, we did – we do have a handful of engines that are still on completed contract and so those represents substantial amounts of – basically work in progress, but it's essentially finished product inventory almost, because it's sitting on test stands. So that's a significant number that we expect to ship.

The second thing is, is that we do have a substantial parts backlog, which we've been building inventory for..

Okay. In terms of the margin at that business, obviously you've been a little disappointing compared to historically. You mentioned that we are going to see an increase or an improvement in the back-half of the year.

Any clear definition of where we sort of maybe land or about in terms of margin just given the disappointment over the last couple of quarters.

Are we going to get back to mid-teens or is it sort of a low-teen number, any sort of idea you have?.

Yes, I mean, there are couple of things that are going on the margin side for this quarter in particular. So first of all, just that we have a very profitable new engine, a handful of new engines that I referred to that are still on completed contract accounting.

And we had one of those that was scheduled to ship in the quarter that slipped into the third quarter, which represented a fairly healthy margin on new engine so that was one reason for the compression.

Combined with that we have a five engine program, commercial engine program that we shipped into South America that is very – and [ph] basically break-even. This was basically a strategic investment that we made to prove that the opposed-piston engine was viable in commercial markets in the emerging economies.

So we needed to prove the viability of the product line and now we got a plan in place for how we basically value engineer and improve the manufacturing processes to improve the profitability of those commercial offering going forward. I would point to the EDF win as a substantial commercial win which does have very healthy economics for the company.

So that was the second thing that was going on. And those five engines all – four of the five have shipped and one is on the test stand as we speak. So, so that's for the most part in the second quarter, Jeff. That's behind us….

Okay..

The second thing you'll remember, that of the last – that's probably three quarters we've had very weak parts sales. And you need to remember, parts sales are kind of in the 40% margin range. So we really make a lot of our money on the aftermarket.

And when we were hit by the impact of sequestration that we talked about to you before, that had a substantial impact both on delevering the business, but also just a negative mix effect. When we look at our parts backlog and the order rate in the second quarter that was as strong as it's ever been.

So, when I look at sort of the full year margin picture it will be substantially better than the full year margin picture last year, more in line with the low teen that you're referring to. We won't likely get up to the high-teens number that we put on the board in 2012, because we just won't see the same level of aftermarket activity.

That was a little bit of an anomalous year which we talked to you about before, but we should be in the low- to mid-teen's range would be my expectation..

Joe Mondillo – Sidoti & Co. LLC:.

:.

Yeah, that's a – first of all we're very excited about it and there was a big – if you follow that industry – when our president of FME was over in Germany for the announcement of this with MAN team, it was a big deal. We had a real formal kind of signing announcement and it got good trade press coverage as well.

So, basically MAN has been struggling to some extent because of the lack of infrastructure they have in the U.S. selling into the kind of power generation market, but they actually have a very, very good in competitive product both diesel and dual fuel. So, because of our relationship with MAN we kind of said, hey, we think we can sell them for you.

And so we will do the packaging and integration of those units in Fairbanks. So it's really, really tough to say Joe, I'd rather not get out there with a projection of what it takes, I can tell you of what we expect, because it's just so uncertain that at this point. I mean, this is a new arena for us.

We got a bunch of projects that are underway and I'd rather have a win or two that I could talk to you about and then talk about expectations before kind of laying that out as an expectation, just because it's so new to us. However, I certainly hope that we have at least a new win to talk to you about in the first-half of next year at the latest.

So, at that point we'll be able to talk more about, what we think the real financial implication to that area..

Okay. Good enough. Thanks a lot..

Okay. Yes..

(Operator Instructions) Your next question comes from the line of Todd Vencil from Sterne. Your line is open..

Hey, guys. Good morning..

Good morning, Todd..

Hey, Todd..

Thanks for all the comments around the margin. I'm going to press on a little bit more but just to make sure that we're kind of getting it right. Steve, I think in your prepared comments, you said that the third quarter was going to be better than second quarter 2014 and better than third quarter of last year.

First of all, did I hear that right, and second of all, are you talking in terms of segment profit there?.

Yes..

Okay, good.

Following up on just a few things that the – you said the Stemco distribution center costs were running over $1 million a quarter and that was going to start to tail off, I mean, we are thinking about that as maybe less than $2 million in the back-half of this year?.

That’s pretty aggressive, because we're already at the end of July, we still got two more weeks to get everything, we think fully shifted over. We've been really, really working hard to try to get things out to customers on time, and so we're still and that’s still our primary goal on time and completed.

So, we've got a fair bit of a temporary labor in place in locations et cetera. So, I think reasonable expectation would be to see something in the same order of magnitude in Q3 and then hopefully a little bit less in Q4. So I think, if you look at the whole back-half, I certainly think, I think you can build in a little bit under two, but not much..

Got it..

Yes..

But then you think, maybe Q1 of next year you are going to see that put to a tailwind from a headwind?.

Yes, we're at least neutral, right?.

Yes, okay. Okay, good.

Alex, you kind of come in with a follow-up that I thought was useful, you said, if you look at the year-to-date margin, I think that it was – I think this is overall segment margin that it was down, but if you look at the full-year, you think the segment margin this year is going to be up about a point, is that – did I hear that right?.

No, I was comparing the first-half to the second-half..

Okay.

So you think the second-half should be a point better than the first-half?.

Yes, little bit, probably a little north of that, but yes..

Got it, okay. And on Sealing, I guess, I heard the directional comments about the things and again this is Sealing segment, things are going to hang around, including particularly we're spending on R&D which is great and the Stemco facility, which we just talk about.

Once that Stemco facility build out and the spending there is kind of they're done with, just to follow-up on one of the first questions, are you thinking that the Sealing segment margins end up back in the 15, 16 range, ultimately, I mean, is that kind of the natural level Alex, a lot of this other stuff that given the heavy….

Yes, I mean, so just to be clear, there just sort of adding it up. Year-to-date, there is about almost $4 million in costs within Sealing that aren't hanging around..

Okay..

In the quarter, they were about $3.5 million of those that aren't hanging around. So it’s not correct to say that, a substantial portion of the cost is going to hang around in Sealing.

To your original question, do we think that sustainable margins for Sealing are in the mid-to-high teens range? I think absolutely we believe that’s the only place I would say that we have a little bit of concern is within the pipeline business, the oil and gas business because of the competitive pressures on that core product that Steve mentioned, which is by the way that entire pipeline business for us is only annually $80 million, $90 million of the segment.

So it’s a relatively small piece of the overall segment. Everything else that we are doing are investments that will payout significantly in the long run, and then of course you always have the mix issues that Technetics is the nuclear semiconductor mix occurs..

And Todd, I would just add to that, I mean, Engineered Products it’s actually going [ph] along pretty well. We're really encouraged by the performance of GGB in the quarter and certainly CPI has started any deterioration as it stabilize and it’s starting to actually show signs of improve, which we are kind of right on plan for the year there.

So we're pretty darn pleased with the changes that have been put in place, fundamental changes put in place at CPI. So those two businesses are in great shape.

Stemco continues to perform exceptionally well, with the exception of this distribution center, which did turn out to be a little bit more challenging than we had anticipated, but the team is certainly got at this point and strategically and absolutely the right thing to do and we'll give a huge customer benefits as we go forward for them to be able to deal with one Stemco.

So as Alex said, the only and SME, SME for all the reasons we've talked about, has just really if you look at last year and the first-half of this year, has suffered from a number of coincidence – coincidental events that some of which are just happen to be timing and some of which are issues that we are addressing through our commercial expansion that actually pretty darn encouraged about that, it just doesn’t happen overnight, but we'll see a lot better performance out of SME in the back-half of the year, and we're pretty confident in that, because we basically already got all those orders.

So the only place the company I'm really kind of structurally concerned about it, going forward is this oil and gas segment that Alex mentioned, which is a portion, the pipeline business of Garlock. We are seeing some concerns there on the demand front and the pricing front.

So that’s and we are working on that and fighting through that, but the rest of the company actually even in spite of the kind of disappointing financial results in Q2 is operating pretty darn well, and I think poise to put much better performance through the back-half of the year..

Good. And you just anticipated and answered my last question, so thanks for that. And the only other thing I want to say is thanks for putting those performance in there, that’s incredibly helpful, and I think probably helps you guys going forward. So good job there..

Okay..

Your last question comes from the line of Jeffrey Hammond from KeyBanc. Your line is open..

Hey, guys..

Hi, Jeff..

Jeffrey Hammond – KeyBanc Capital Markets:.

:.

Yes, so this has to do with the particular product line, it’s an insulated gasket that goes into pipeline and it’s a – it’s really driven by some aftermarket, but a lot of it is new project work for pipeline development.

And actually if you peel back the covers and look at the fundamentals of investments in upstream oil and gas development projects, it’s kind of leveled out, it’s certainly not growing like it was in the last three or four years, I can send you some on that if you – I'm sure you find it too, but as you look at the fundamentals.

And so, yes, demand has – is not showing the kind of aggressive expansion that we've seen four, five years. That’s numbers one. Number two, this is a product line that the patent expired some number of years ago. And over that time, competitors have, I mean they recognized our dominant share in this business.

And so the developed a knockoff that they are trying to move into the marketplace and they are obviously moving in with aggressive pricing. And so we are trying to come back that, so we've seen margin pressure there.

So, yes, we have that that whole product line has attracted actually a couple of new competitors, it’s not – it’s a pressure that we've seen in the past, but it's intensified quite a bit here in the first-half of the year, also because the market is not growing like it was previously.

But again, as Alex said it’s one product line and even – that’s not even the whole – there is other pipeline products that Garlock sells and in aggregate these are all, would you say $60 million, $70 million of revenue. The specific product that I'm mentioning is less than half of that.

So it’s not a huge impact overall, but it’s a nice product line that we've had great market share of that we just don’t see ever getting really back to the level that it’s been. We've innovated a new kind of a fire safe version of it that we are trying to sell, that’s a premium product to protect that position.

We are the only ones who have that, that is on patent and so that’s helping us defend. But it’s a – it’s always tough when you get – you get new competitors that enter.

So that's – is that helpful to you?.

Yes, yes, perfect.

And then just on the Power Systems, can you clarify, Alex, that the margins you're looking for low-teen margins for the year in Power Systems or for the second-half?.

No, they're for the year..

Okay.

So that would imply something closer to that high-teens that you had experienced for a period of time?.

Yes, for the second-half of the year..

Okay..

Again that's going to be….

And you have good visibility on that?.

Stephen Macadam:.

So our aircraft carrier program is one that had multi-year to it. It's large, very sophisticated engines that are still on completed contract. And so we've got a few completed contract engines that are scheduled to ship through the balance of the year. And there is still the risk that one of them in particular would slide into Q1 of 2015.

So the numbers that Alex is coming forward with assume that that gets shift this year, which is the current schedule, and we're obviously doing everything we can to hold that, it would not be slipped because of us..

Okay..

But that it could get slipped. You remember what we used to be and then when we did all completed contract, we had this conversation every quarter. This is – we don't know how many left, but we do have a couple this year..

Okay. And then as you look out when you start getting this CDF contract and maybe some of these commercial contracts and you look at the moving pieces and then may beside [ph].

I mean, what's kind of the right margin trajectory long-term to think about for this business?.

Oh gosh, that's a tough, I think it all depends on the success of the OP 2.0, because you've heard me talk about that in conferences and whatnot. I mean, I was excited about that new technology as anything in our company. I mean this could be – it could be a complete game changer in the diesel world. However, it's a development project.

We're very encouraged. We're moving forward with a prototype engine for full-scale testing. We're in great position to do that, because we're modifying our existing OP design with this new several really, really important (inaudible) technologies that are applied to our engine. And if that is – and unfortunately, it's going to be a bit binary.

If it's successful, goodness, we could be selling, and through four years we could be selling 50 engines a year, and if it's not successful, we probably won't sell (inaudible). So it's a huge and I just can't – it's really hard for me, Jeff, to handicap.

So I don't want to get it out there with expectations that we're going to be able to deliver it for sure, I was like – deliver the performance of the engine for sure, but also I can tell you so far we're pretty encouraged..

Okay.

And then just final thing on the ACRP, so it sounds like we're not going to get anything new at least to the early or still kind of this early October hearing, is that fair?.

Stephen Macadam:.

Well, there is a lot of people interested in that, because it really points to the ugly behavior chose exactly who is doing what and it would expose the entire record to the public.

And so that's the one that has been entered by a number of insurance companies, Legal Newsline is leading the way to try to get access to this Ford Motor Company, Volkswagen, and several insurance companies have all jumped in, because obviously anybody who is (inaudible) defendant has interest in this issue.

It's been written about a lot in the press as you know, and so that was moved up to the District Court. And the District Court judge ruled on it gosh week or week-and-a-half ago and basically said, yes, it's not clear that the bankruptcy judge followed the full process to determine whether this should be kind of forever kept confidential.

The judge kind of knew he was doing that, because he really wanted to move the thing forward. There is a specific protocol necessary and a burden of proof required to keep Federal Court records confidential and normally that's vetted in a fairly extensive hearing process and so forth and so on.

Then our judge basically deferred till down the road, so we could move ahead with the estimation trial. And so the district judge has basically pushed that back down to the bankruptcy judge level and said, no, you really need to go through that vetting process, and so that has, excuse me, that has to happen.

That will take probably a month-and-a-half to two months to get that that resolved. Now, it's obviously not something that the plaintiff's committee wants to come, become public. So that's a big issue for them.

We've kind of pulled out of it, because we got others that are – as we pulled out of that fight directly, because we've got whole bunch of other people that are leading that charge just fine, so….

Okay. Thanks, guys..

All right..

I will now turn the call – sorry, I'll now turn the call back over to Dan Grgurich for closing remarks..

Okay. Well, thank you all for joining our call this morning. If you have additional questions or you can just call me at 704-731-1527. Thank you..

This concludes today's conference call. You may now disconnect..